Different tax rules for non-resident alien taxpayers

Non-US citizens have the added tax complexity of figuring out whether they need to file their tax return as a “resident” or “non-resident alien”. We covered the steps to do so in this blog article. Typically, the next question that our international clients ask us is “are there different tax rules for non-resident alien taxpayers?”

The answer is yes, there are some significant differences. For starters, your tax return will be filed on Form 1040NR rather than Form 1040. However, one is not necessarily always better than the other. In fact, many of our clients are surprised when they realize that filing as a non-resident turns out to more advantageous to them.

This article will walk you through the major advantages and disadvantages.

1. Resident taxpayers are taxed on their worldwide income

Do you earn any income from a business or job in your home country? Have a rental property outside of the U.S.?

That income will be subject to tax in the U.S. if you are classified as a resident taxpayer. That’s because the U.S. has a worldwide taxation system, instead of a territorial system, taxing its citizens on income earned anywhere in the world. If you file as a resident, you too have to pay taxes on your worldwide income.

List this one in the advantage to non-residents. As long as you are classified as a ‘non-resident alien’ taxpayer, your foreign income is exempt from U.S. taxes.

2. Fewer tax deductions and credits for non-resident taxpayers

Pay tuition for college or graduate school education? Would you otherwise qualify for the earned income tax credit?

Unfortunately, some of these tax breaks are not available to non-resident taxpayers. For instance, resident taxpayers with qualified education expenses could use the American Opportunity Tax Credit to lower their tax bills by up to $2,500. Non-residents don’t have that option.

Put this one in the disadvantage column. Non-residents could end up paying higher taxes as a result of having fewer deductions and credits available.

3. Exemption from payroll taxes for non-resident international students

The two primary entitlement programs in the U.S. are social security and medicare, both of which are funded through payroll taxes that total over 7.5%.

That means if you make $100,000 of wages, you will pay over $7,500 in combined payroll taxes (also known as FICA taxes). The great news for non-resident international student taxpayers? They’re exempt!

Yep! If you’re on a F, J, M, or Q visa type and file as a non-resident, then you do not owe FICA taxes. Chalk this one up as likely the biggest tax advantage for some non-residents, as the savings from avoiding payroll taxes can clearly be significant.

Do you have savings in an international bank account? Do you have a retirement account or pension plan overseas?

As a resident taxpayer, if any of these accounts contain over $10k in USD-equivalent value, you likely need to disclose them to the U.S. government. You can learn more about the requirements here.

While there is no tax associated with these disclosures, there are significant penalties for failing to do so (we’re talking penalties of like $10k). Non-residents aren’t required to disclose, which is a nice benefit over resident taxpayers.

If you have foreign bank accounts that need to be reported, make sure to work with a professional tax advisor.

5. ‘Married filing jointly’ option not available to non-residents

Are you here in the U.S. with a spouse who is also a non-US citizen?

If so, two married non-residents will have to file separate tax returns. For residents, they have the option to file ‘jointly’. While there isn’t much of a tax impact to this difference, there is some simplicity to being able to file jointly instead of individually.

If one spouse is a non-resident and the other is a resident, you can choose how to file. You can either file jointly as ‘residents’, or the one spouse can file as a ‘resident’ and the other as a ‘non-resident’. In this case, it’s best to consult a tax advisor to help evaluate which option will result in the lowest amount of taxes.

Next Steps

Have any other questions around the different tax rules for non-resident alien taxpayers? Need to file a Form 1040NR tax return? We’re happy to help!

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